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Delays Buckle Engineered Support

Problems with a large project continue to drag down results and have the company on the defensive.

It doesn't look like the going is getting any easier for shareholders in Engineered SupportSystems(NASDAQ:EASI). The stock of this military supplier is falling today as investors react negatively to a tough quarter and uninspiring guidance.

Although the company did well in the aftermath of U.S. military involvement in Afghanistan and Iraq, some of that momentum appears to be fading. While revenue was up 17% as reported in the third quarter, stripping out acquisitions reduces that growth rate to a pretty anemic 3.5%. In addition, margins have stayed under a bit of pressure and earnings from continuing operations were up only 10% for the quarter.

Once again, Engineered Support Systems was troubled by delays tied to the Deployable Power Generation and Distribution System (DPGDS) project. Although reliability testing reportedly has gone well, the military has not yet reversed a stop-work order on the project. Management is still optimistic about resuming production by the end of the fiscal year (October), and that will clearly be an important milestone for investors to follow.

All in all, I'm finding it hard to get really worked up about this stock. True, the company is free cash flow positive and still managing a double-digit return on equity on an annualized basis. What's more, its backlog could be worth as much as $2.3 billion if unfunded options on contracts are picked up.

That said, management's lowering of guidance doesn't exactly fill me with a lot of confidence for strong future growth. What's more, we're talking about a military supplier here -- which means its future prosperity is tied up in the agendas and plans of the government and military. Simply put, spending priorities can turn on a dime and the military doesn't always get all of the money it wants to fund its hundreds of projects.

Although I think Engineered Support Systems is a reasonably well-run company, current valuations don't offer me the sort of margin of safety that I seek. Frankly, I'm a bit tempted to think that the whole military and intelligence build-up angle has already been played out in the market. Even if I'm wrong about that, I think I'd make sure to take a look at companies like L-3(NYSE:LLL) or General Dynamics(NYSE:GD) before diving in to this stock.